Shares in focus: The Google of Britain’s housing boom

Online property portal Rightmove has been a stunning success story. It has truly changed the way people look for somewhere to live at a time when other internet ventures promised, but failed to revolutionise markets.

Rightmove.co.uk, founded in 2000 at the height of the boom, has become the Google of the online property market. It has been so successful that it now ranks as one of the most popular websites in the country behind a handful of others, such as Facebook, eBay and Google itself.

Its success has brought with it impressive profit growth and fantastic returns for shareholders. The business now has a stock-market valuation of £2.5bn. Its shares are very highly valued by the market, which implies that the company’s profits will continue their stellar rise in the years ahead. The question is, can it keep on delivering – or is this as good at it gets?

How the business has fared

With a market share of more than 80%, Rightmove dominates the British online property portal market (Zoopla is a distant second). It has nearly 19,000 estate-agency offices and housing developments on its books, tapping into Rightmove’s unrivalled ability to reach out to potential buyers and tenants.

The company’s success is down to its technology, marketing and branding, which have made it very tough to compete with. It need make no heavy investment in assets, which has allowed it to make huge amounts of money.

A profit margin of 73% – virtually unheard of in most businesses – allows Rightmove to generate bucketloads of surplus cash to pay out to shareholders.

The company has proven very flexible in response to a changing property market. During the gloom and doom of a few years ago, when many of its estate-agency customers went out of business, it was still able to cut its costs and increase profit margins.

There’s no doubt Rightmove has done a good job for its customers. Its site can generate many more potential buyers or tenants for a property than a local newspaper can. It’s also kept adding new services, such as local valuation alerts or agent microsites (these are similar to eBay shops, allowing users to personalise their presence), which means it has been able to keep on increasing its prices.

It has also been able to profit from the government’s Help to Buy scheme, which has caused the housing market to boom again by helping housebuilders promote their developments. In return, housebuilders are typically paying Rightmove 50% more per month than estate agents do.

Given the company’s powerful market position and buoyant housing market it’s no surprise that stock-market analysts expect Rightmove’s profits to keep on rising by 20% per year. But storm clouds could be gathering on the horizon. In many markets, high profits attract competition and prices come down. Could Rightmove be vulnerable to this?

It seems that a growing number of estate agents are becoming concerned about the power of Rightmove and the prices that it charges. Five years ago, an estate agent’s office was paying just over £300 per month for Rightmove to advertise its properties. That figure will probably be £600 in 2014. For many agents that’s too much. They are worried that left unchecked they could be paying £1,000 per month in five years’ time.

So, big agents such as Savills and Knight Frank have teamed up with Ian Springett (the founder of Primelocation.com) to form Agents’ Mutual – a rival portal that will be owned by the agents who advertise on it. It plans to launch later this year or in 2015 and it’s rumoured it will charge around £400 per month, falling to £250 in five years.

Will this really damage Rightmove? Sure, reducing its fees to £400 or £250 would see much lower profits, but can a new entrant really build up the scale and branding of Rightmove quickly? Would agents really want to dump Rightmove? Would house hunters find it to be as good?

It’s by no means certain. But what does seem clear is that Rightmove’s business model could face a challenge over the next couple of years. If it can’t keep on jacking up its prices then it may struggle to grow as the number of agents it is taking on isn’t really changing. Help to Buy has also created something of a false market for property, which cannot go on indefinitely.

Should you buy the shares?

The shares’ valuation of 27 times 2014 forecast earnings is very high and leaves little, if any, room for disappointment. To make money buying the shares now, you have to believe that profits will keep growing rapidly and that the stockmarket will continue to value them at a high multiple (a high price-to-earnings ratio). This may be too much to count on.

As good a business as Rightmove is, the risk of disappointment looks too high at the current price. Returns from dividends are very small as well, while the large sums of money being spent on buying back shares seem a poor return on shareholders’ money.

Long-term shareholders might be content to stay on board, but we wouldn’t be chasing the shares now.

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